One of the most common questions we get asked as equity release advisers is whether a lifetime mortgage is 'flexible' enough to meet any future change in circumstances?
Having reached retirement, experience has taught us all that life can be full of surprises and quite rightly this question is always high on the agenda.
This article has been written using my 10 years equity release experience & how I have helped guide my clients towards their ultimate goals, but at the same time alleviating any inhibitions surrounding equity release and moving home in the future.
The most common apprehensions regarding flexibility and moving or buying a new home can be summarised as follows:
- Can I move home if I have already taken out an equity release plan?
- Can I use equity release to purchase a new property
- How much can I raise on a new home using maximum equity release schemes?
- Can I transfer my existing equity release scheme to a new home?
- Can I still take out equity release if I downsize?
- If moving house, is it worthwhile transferring, or taking out a new plan?
So how does an equity release adviser dispel the fears and help their clients overcome the concerns that a release of equity mustn’t feel like a noose around their neck?
Considerations on Moving Home from an Equity Release Advisers Point of View
When we consider the question of a possible future house move, we can divide this into three very different scenarios; each one deserving separate consideration in its own right: -
- The first equity release scenario captures the proposition of using a lifetime mortgage, or home reversion plan to help fund the purchase of a new house
- The 2nd situation analyses the advice & legal process required when purchasing or moving home, utilising an existing equity release plan.
- Lastly, we explain the advisers perspective on what options are available to a client with their existing equity release mortgage, upon moving home
Scenario 1 – Can I use Equity Release to help fund a house purchase?
An increasing number of enquiries seem to be coming in from people who are looking to move home, and this can be for various reasons. Some are looking to move nearer to their family for support, others are looking to downsize to repay loans and mortgages. Still others simply want to buy that bungalow they had always dreamed of for when they retired.
In the majority of cases, the best way to use equity release schemes to help fund a house purchase is to transact them simultaneously. This means involving an equity release application to be used as part of the legal process to buy. Consider this theory as exactly the same principle as using a conventional residential mortgage to help buy a new property.
In essence, by taking equity release at the same time as house purchase will save money by not duplicating the legal work, should a release of equity be needed at a later date. The rationale is that only one set of legals are required should equity release & the purchase be transacted simultaneously. However, if a release of equity is taken post purchase, then two set of legal costs are incurred; at the time of the house purchase, but then again later when equity release is done in isolation.
The rules are fairly straightforward, whether you use a lifetime mortgage or a home reversion plan for this purpose. A given percentage of the value of the proposed purchase property would be made available, depending on the age of the youngest applicant, and some or this entire figure would be sent to the conveyancer on the day of purchase to enable completion to take place.
Mr & Mrs Townley are aged 65 and looking to buy a property nearer to their daughter at a cost of £200,000. Their own home has been sold for £180,000 and, bearing in mind the additional costs involved, they feel they would need a further £30,000 to complete the purchase.
Following research, their lifetime mortgage adviser has recommended the Aviva Lifestyle Flexible Option where they could release upto 25% of the value of their new property. This potentially could provide them with a maximum release of £50,000.
They decided that they only want £30,000 of this for now but, as they don’t know what the future may hold, they ask for a cash reserve facility to be set up so that they could access the other £20,000 in the future, just in case they need it later.
Scenario 2 – Can I move home AFTER releasing equity on my home?
This is a different question altogether, but is definitely another one that comes up most of the time. Most people want to know before they enter into an equity release agreement, what would happen if they moved home in the future? This could be downsizing when one partner is left on their own, or moving into sheltered accommodation, if health dictates it becomes necessary.
First of all it is important to acknowledge that any lender that is a member of the Equity Release Council (which recently replaced SHIP) will allow the transfer of an equity release plan to a new, suitable property. Portability is an important facet of all equity release schemes.
Important considerations for anyone releasing equity include what they think MAY happen, or which is MOST LIKELY, as none of us know what’s around the corner.
If downsizing is the most likely outcome, then it should be very easy to find a lender that will allow this with the facility to move the equity release plan at the same time. A valuation would be carried out on the new property and the maximum configured equity release would be calculated. Having access to a lifetime mortgage calculator would be an advantage.
If the amount currently owed, is in excess of the maximum amount available for release on the new property, then the excess would need to be repaid from the profit made through selling and buying the cheaper property.
Of course some people want to have the flexibility of repaying the loan in full if they downsize later on and this is where some care is needed from outset to ensure this is possible.
As lenders become more attuned to what is important to equity release customers we are seeing some innovative thinking and I for one hope that this is a trend that will continue to grow over the coming years.
Scenario 3 - What should I do with an existing equity release if I want to downsize or purchase new?
This scenario is a continuation of the previous section, albeit taking into account in greater detail the options available & what should be done with an old equity release plan. It would be amiss of any adviser to automatically assume it would be in the client’s best interest to port an old lifetime mortgage or home reversion plan to the new property.
This is a key opportunity for an overall review of the older plan to establish its competitiveness in today’s equity release environment. From my experience of working at Norwich Union Equity Release (latterly Aviva), I am aware of older legacy equity release plans that in today’s world are outdated and uncompetitive.
My Experience of Norwich Union’s Legacy Equity Release Plans
The forerunner of all of Aviva’s equity release plans was called the Capital Access Plan. The Norwich Union Capital Access Plan had an interest rate, not charged against the balance, but calculated against the property value escalating over time. People with these plans who have seen a large increase in property value, will also had seen a proportionate increase in their equity release balance.
Another legacy plan which is no longer available is the Norwich Union Index-Linked Cash Release Plan. This a scheme which offered a maximum equity release lump sum from age 55, but with an interest rate linked to Retail Price Index (RPI). This Index Linked Cash Release Plan had a minimum interest rate of 4.89%, rising to a maximum rate of 10.14%. The calculated rate was dependent upon on the annual change in RPI which was then added to the minimum rate of 4.89%. Hence, this scheme did not provide as much certainty as today’s lifetime mortgage fixed rates.
From thereon in, Norwich Union or Aviva Lifetime Mortgage schemes had interest rates over 8%pa and potential early repayment charges of 100% of the original balance borrowed. Its schemes such as these that need assessing as to whether they should continue, or if favourable, could be repaid upon sale & a new plan taken upon simultaneous purchase of the new property. With rates today from Aviva as low as 5.68% annual, it could make sound financial sense to consider a new scheme which could save many £1,000’s over time by switching.
Free Initial Consultation
It is therefore essential for an experienced independent equity release adviser to undertake a full review of the entire situation & provide an impartial recommendation as to what is best advice moving forward. This will involve requesting an upto redemption statement from the existing lender, analysing the existing scheme & importantly assessing all the features including potential early repayment charges.
Equity Release schemes that were taken out some time ago are usually not as competitive, or flexible as plans around today, given the period of low interest rates incumbent over the last 2-3 years.
I would advise ANYONE thinking of moving to take advice as it may well be cheaper to change lender than staying with your current one and transferring your plan to the new property. The only way of finding this out is to take advice from an Independent Equity Release Adviser that is able to research the WHOLE of the market. By conducting a switch plans analysis, Equity Release Supermarket can address whether it would be worthwhile, or not, to switch equity release plans when moving home.
Examples of lenders already attuned to the option of downsizing – Hodge Lifetime
At the moment if anyone is thinking of downsizing in the future and repaying their equity release plan in full, then serious consideration should be given to a new plan such as the Hodge Lifetime Flexible Mortgage Plan.
This plan allows the borrower to repay the whole amount WITHOUT PENALTY if they decide to move home & downsize, as long as this is at least 5 years after inception of the plan.
Alongside this downsizing protection option is the fact that, if something unforeseen should happen and you need to move and repay during the first 5 years then the Hodge Lifetime penalty for doing so would be capped at 5% of the initial release in year 1, 4% in year 2, 3% in year 3, 2% in year 4 and then 1% in year 5. Significantly, the Hodge Lifetime penalty is more favourable than many of the gilt linked product related early repayment charges.
I believe this gives an added degree of flexibility for equity release consumers, and I hope it’s an indication that lenders are changing the way they change tact & begin providing greater flexibility as the need to move home in the future increases.
The fact remains that it is possible to move home and it’s imperative that you get the right advice when considering equity release initially AND when thinking of a house move as well.
It is probably one of the most important decisions you will make financially, as the decision you make now will not only impact on your future, but also your children & grandchildren’s future.
These are the reasons why we at Equity Release Supermarket always offer a free, no obligation, initial consultation which can be in the comfort of your own home or over the telephone, whichever is preferable.
This initial consultation gives us the chance to ask our clients about their objectives as well as their future plans, so that we can tailor any Equity Release scheme we recommend to each individual set of circumstances.
For your FREE, NO OBLIGATION, initial consultation (whether it’s your first time or if you want to review your current scheme) please call Mark on 07966 889597 or e-mail [email protected].